The decade-long bull market in the precious metal is over, after hectic selling drags down silver and copper
The biggest plunge in the gold price for more than 30 years has wiped $1 trillion off the value of global reserves of the precious metal, leaving small investors reeling as popular funds have lost a fifth of their value in just a matter of weeks.
In hectic selling that began last Friday, the price has dropped from $1,580 an ounce to $1,380, dragging other metals down. Silver has sunk from $28 to $23, while copper is down from $7,500 to $7,100 a tonne.
Small investors in widely-held funds such as BlackRock Gold & General have suffered. The BlackRock fund, which has £1.6bn under management, has lost 21% of its value over the past month and 36% over the past six months. It invests in the shares of gold and metal mining companies – and these have fared even worse than the gold price.
Barrick Gold, the world’s biggest gold miner, has seen its shares slump on the Toronto stock market from C$55 to just C$19 since last September. Newcrest Mining, an Australian gold miner that is the biggest holding in the BlackRock fund, has fallen from A$30 last September to A$17 this week.
But Richard Davis, managing director of BlackRock’s Natural Resources team, says the fall has to be seen in the context of the long rise in the gold price, which rose 405% between January 2000 and January 2011.
“We don’t see this sell-off as the beginning of a bear market for the metal,” he added. “Longer term, the factors that have driven the bull market in gold have not gone away. We are yet to see the real ramifications of quantitative easing, in terms of inflation.
“At the same time, we expect jewellery demand to pick up at these lower prices, especially in China. The recent sell-off has been largely indiscriminate, which has presented us with some excellent buying opportunities for the longer term. We have been adding to several positions in the Gold & General Fund.”
But it might be expected for a fund manager to talk up his fund. Another gold market expert, who preferred to remain anonymous, said: “For a long time the gold price was outperforming the price of shares in gold mining companies, and fund managers were saying the two had to converge. But it just hasn’t happened. Very few of them pay a dividend, the costs of extraction have risen sharply, and they are leveraged to the gold price on the way down.”
But why has the gold price fallen so far and so suddenly? Some say it was prompted by investment bank Goldman Sachs, which, last Friday, recommended its clients go “short” on gold, slashing its longer-term forecast for the price of gold to $1,270 by end 2014 – a target it has nearly hit already. It marks a U-turn from the end of 2011, when Goldman Sachs was telling investors that gold would hit $2,000 an ounce.
More bearish commentators, such as Viktor Nossek, head of research at exchange traded fund provider Boost, wrote before the recent price crash that gold was heading into a two-decade long bear market. “We are possibly entering a stage of prolonged weakness in the price of gold,” he says.
Some predict that gold is heading back below $1,000 an ounce, and point to charts that suggest similarities with the last crash, between 1980 and 1983, when it fell in price by half and stayed low for another decade. But others suggest darkly that the market has been temporarily rigged by short-sellers.
Direct selling of gold by British investors has been relatively muted, says Adrian Ash of Bullion Vault, which stores 33m tonnes of gold worth more than £1bn on behalf of 45,000 investors. He says sellers have dumped only 1% of their holdings and that customers turned net buyers by Wednesday this week.
He blames a range of factors for the sell-off, including the US Federal Reserve’s indication that it is less inclined to print more money; news that Cyprus may sell its reserves, possibly followed by other European governments; and a slowdown in Chinese growth. However, he believes fundamentals, remain supportive: “While we don’t see the price suddenly going back up, neither do we see it in the long term falling substantially from the current level.”
The good news for the vast majority of people whose only connection with gold is their teeth or their wedding ring, is that the sell-off in commodities has been across the board. The price of oil has also fallen, from $110 a barrel at the beginning of April to $99 this week, finally giving some relief to motorists, with all the major supermarket chains cutting pump prices by 2p-3p a litre.